NORTH BAJA PIPELINE LLC — Notice of Probable Violation

520111001_NOPV PCP PCO_04282011_text.pdf, page 1Official PDFNOTICE OF PROBABLE VIOLATION PROPOSED CIVIL PENALTY and PROPOSED COMPLIANCE ORDER CERTIFIED MAIL - RETURN RECEIPT REQUESTED April 28, 2011 Mr. Ken Leier Region Director TransCanada U.S. Western Pipe Region 534 E. Spokane Fall Blvd. Spokane, WA 99202 CPF 5-2011-1001 Dear Mr. Leier: On December 8-13, 2010, a representative from the Arizona Corporation Commission on behalf of the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA), pursuant to Chapter 601 of 49 United States Code, inspected your Ehrenberg Compressor Station and mainline pipe in Western Arizona. As a result of the inspection, it appears that TransCanada, North Baja Pipeline LLC have committed probable violations of the Pipeline Safety Regulations, Title 49, Code of Federal Regulations. The items inspected and the probable violations are: 1. §192.605 Procedural manual for operations, maintenance, and emergencies (a) General. Each operator shall prepare and follow for each pipeline, a manual of written procedures for conducting operations and maintenance activities and for emergency response. For transmission lines, the manual must also include#

520111001_NOPV PCP PCO_04282011_text.pdf, page 2procedures for handling abnormal operations. This manual must be reviewed and updated by the operator at intervals not exceeding 15 months, but at least one each calendar year. This manual must be prepared before operations of a pipeline system commence. Appropriate parts of the manual must be kept at locations where operations and maintenance activities are conducted. TransCanada did not follow its written procedures for repairing pipeline coating. Per TransCanada’s Operating Procedure (Manual)/Specification “TES-COAT-EPU-US External Epoxy/Urethane Coating Systems, March 19, 2007 - repairing pipeline coating damage requires that any affected areas be cleaned by sandblasting and/or roughing up of the original coating. In December 2007, TransCanada sought to repair an area of damaged coating on its pipeline. When that area was excavated in December 2010, it appeared as though hand- applied epoxy had simply been placed over the bare surface and original coating. Photographs of the excavated pipe are evidence that the pipe in the excavated area not had been prepared by “sandblasting” and/or roughing up of the repair areas original coating. The “sandblasting” and/or roughing up of the repair areas original coating are required in the company’s written procedures. 2. §192.605 Procedural manual for operations, maintenance, and emergencies (b) Maintenance and normal operations. The manual required by paragraph (a) of this section must include procedures for the following, if applicable, to provide safety during maintenance and operations. (2) Controlling corrosion in accordance with the operations and maintenance requirements of Subpart I of this part. Per TransCanada Operating Procedure (Manual) 25.0 192.463 – Cathodic Protection Criteria, TransCanada did not have a written procedure in place for identifying what level of abnormally high pipe-to-soil potentials would require remedial action. In the absence of that procedure, TransCanada allowed the station yard to have potential pipe-to-soil readings in excess of 2.0 volts for several years, and there was coating disbondment and damage found when yard piping was exposed in December of 2007. Proposed Civil Penalty Under 49 United states Code, § 60122, you are subject to a civil penalty not to exceed $100,000 for each violation for each day the violation persists up to a maximum of $1,000,000 for any related series of violations. The Compliance Officer has reviewed the circumstances and supporting documentation involved in the above probable violation and has recommended that you be preliminarily assessed a civil penalty of $16,200.00 as follows: Item number PENALTY 1 $16,200.00#

520111001_NOPV PCP PCO_04282011_text.pdf, page 3Proposed Compliance Order With respect to item number 2, pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration proposes to issue a Compliance Order to TransCanada. Please refer to the Proposed Compliance Order, which is enclosed and made a part of this Notice. Response to this Notice Enclosed as part of this Notice is a document entitled Response Options for Pipeline Operators in Compliance Proceedings. Please refer to this document and note the response options. Be advised that all material you submit in response to this enforcement action is subject to being made publicly available. If you believe that any portion of your responsive material qualifies for confidential treatment under 5 U.S.C. 552(b), along with the complete original document you must provide a second copy of the document with the portions you believe qualify for confidential treatment redacted and an explanation of why you believe the redacted information qualifies for confidential treatment under 5 U.S.C. 552(b). If you do not respond within 30 days of receipt of this Notice, this constitutes a waiver of your right to contest the allegations in this Notice and authorizes the Associate Administrator for Pipeline Safety to find facts as alleged in this Notice without further notice to you and to issue a Final Order. In your correspondence on this matter, please refer to CPF 5-2011-1001 and for each document you submit, please provide a copy in electronic format whenever possible. Sincerely, Chris Hoidal Director, Western Region Pipeline and Hazardous Materials Safety Administration Enclosures: Proposed Compliance Order Response Options for Pipeline Operators in Compliance Proceedings cc: PHP-60 Compliance Registry PHP-500 T. Finch (#133556) Arizona Corporation Commission - Mr. Robert Miller#

520111001_NOPV PCP PCO_04282011_text.pdf, page 4PROPOSED COMPLIANCE ORDER Pursuant to 49 United States Code § 60118, the Pipeline and Hazardous Materials Safety Administration (PHMSA) proposes to issue to TransCanada a Compliance Order incorporating the following remedial requirements to ensure the compliance of TransCanada with the pipeline safety regulations: 1. In regard to Item Number 1 of the Notice pertaining to TransCanada not following written procedures for repairing pipeline coating. TransCanada must take the necessary steps to ensure that it is following its written procedures for repairing pipeline coating damage. TransCanada must submit the semi-annual reports describing their efforts to follow their written procedures for repairing pipeline coating damage. These reports must be transmitted to the Western Region Director until it has been determined that TransCanada is following their written procedures for repairing pipeline coating damage. 2. In regard to Item Number 2 of the Notice pertaining to the corrosion controlling program of abnormally high pipe-to-soil potentials. TransCanada must take the necessary steps to ensure that it has written procedures specifying what level of abnormally high pipe-to-soil potentials would require further investigation or remedial action. 3. TransCanada must complete the necessary steps to correct these deficiencies within 60 days of issuance of the Final Order. 4. It is requested (not mandated) that TransCanada maintain documentation of the safety improvement costs associated with fulfilling this Compliance Order and submit the total to Chris Hoidal, Director, Western Region, Pipeline and Hazardous Materials Safety Administration. It is requested that these costs be reported in two categories: 1) total cost associated with preparation/revision of plans, procedures, studies and analyses, and 2) total cost associated with replacements, additions and other changes to pipeline infrastructure.#

520111001_Final Order_11282012_text.pdf, page 1Official PDFNOVEMBER 28, 2012 Mr. Lee Hobbs President and General Manager North Baja Pipeline, LLC 717 Texas Street Houston, TX 77002-2761 Re: CPF No. 5-2011-1001 Dear Mr. Hobbs: Enclosed please find the Final Order issued in the above-referenced case. It makes findings of violation, assesses a civil penalty of $16,200 and specifies actions that need to be taken by North Baja Pipeline, LLC to comply with the pipeline safety regulations. When the civil penalty has been paid and the terms of the compliance order have been completed, as determined by the Director, Western Region, this enforcement action will be closed. Service of the Final Order by certified mail is deemed effective upon the date of mailing, or as otherwise provided under 49 C.F.R. § 190.5. Thank you for your cooperation in this matter. Sincerely, Jeffrey D. Wiese Associate Administrator for Pipeline Safety Enclosure cc: Mr. Chris Hoidal, Director, Western Region, OPS Mr. Alan Mayberry, Deputy Associate Administrator for Field Operations, OPS Ms. Cynthia Presnell, Associate, Regional Asset Reliability, TransCanada, 201 W. North River Drive, Suite 505, Spokane WA 99201 CERTIFIED MAIL - RETURN RECEIPT REQUESTED#

520111001_Final Order_11282012_text.pdf, page 2U.S. DEPARTMENT OF TRANSPORTATION PIPELINE AND HAZARDOUS MATERIALS SAFETY ADMINISTRATION OFFICE OF PIPELINE SAFETY WASHINGTON, D.C. 20590 ____________________________________ ) In the Matter of ) ) North Baja Pipeline, LLC, ) CPF No. 5-2011-1001 ) Respondent. ) ____________________________________) FINAL ORDER On December 8-13, 2010, pursuant to 49 U.S.C. § 60117, the Arizona Corporation Commission, as an agent for the Pipeline and Hazardous Materials Safety Administration (PHMSA), Office of Pipeline Safety (OPS), conducted an on-site pipeline safety inspection of the facilities and records of North Baja Pipeline, LLC (North Baja or Respondent) in Arizona. North Baja’s natural gas pipeline system consists of 80 miles of 30 and 36-inch diameter pipeline that runs from southwestern Arizona into California. The system is operated and partially owned by TransCanada Pipelines Limited.1 As a result of the inspection, the Director, Western Region, OPS (Director), issued to Respondent, by letter dated April 28, 2011, a Notice of Probable Violation, Proposed Civil Penalty, and Proposed Compliance Order (Notice). In accordance with 49 C.F.R. § 190.207, the Notice proposed finding that North Baja violated 49 C.F.R. § 192.605 and proposed assessing a civil penalty of $16,200 for an alleged violation. The Notice also proposed ordering Respondent to take certain measures to correct the alleged violations. TransCanada responded to the Notice by letter dated November 14, 2011 (Response). The company did not contest the allegations of violation but did contest the terms of the proposed compliance order. Respondent did not request a hearing and therefore has waived its right to one. FINDINGS OF VIOLATION In its Response, North Baja did not contest the allegations in the Notice that it violated 49 C.F.R. Part 192, as follows: Item 1: The Notice alleged that Respondent violated 49 C.F.R. § 192.605(a), which states: 1 http://www northbajapipeline.com/ (last accessed on August 16, 2012).#

520111001_Final Order_11282012_text.pdf, page 32 § 192.605 Procedural manual for operations, maintenance, and emergencies. (a) General. Each operator shall prepare and follow for each pipeline, a manual of written procedures for conducting operations and maintenance activities and for emergency response. For transmission lines, the manual must also include procedures for handling abnormal operations. This manual must be reviewed and updated by the operator at intervals not exceeding 15 months, but at least once each calendar year. This manual must be prepared before operations of a pipeline system commence. Appropriate parts of the manual must be kept at locations where operations and maintenance activities are conducted. The Notice alleged that Respondent violated 49 C.F.R. § 192.605(a) by failing to follow, for each pipeline, a manual of written procedures for conducting operations and maintenance activities. Specifically, the Notice alleged that North Baja failed to follow its operating procedures when repairing pipeline coating damage. According to Respondent’s procedures, prior to repairing pipeline coating damage, the affected area must be prepared by sandblasting or “roughing up” the original coating. In December 2007, Respondent initiated repair of damaged coating on its pipeline. However, upon excavation in December 2010, it was clear that the pipeline was not properly subjected to sandblasting or “roughing up” prior to the application of epoxy. Photographs2 of the excavated area demonstrate that the hand-applied epoxy was placed over the bare surface and original coating of the pipeline, in violation of the company’s written procedures. Respondent did not contest this allegation of violation, but provided information regarding its contract for the repair and the coating specification for the conditions observed in 2007. In its response, North Baja forwarded written evidence that appears to demonstrate that its contractor was to sandblast the damaged areas prior to coating the pipeline. Notwithstanding this evidence, the Respondent acknowledges that “the 2010 photographs show disbondment similar to that observed in 2007 and 2008 ….. [and] the Company cannot produce evidence to demonstrate that the work was performed as indicated by the contractor invoices.”3 Accordingly, based upon a review of all of the evidence, I find that Respondent violated 49 C.F.R. § 192.605(a) by failing to follow its written procedures requiring that, prior to repairing coating damage, any affected areas be cleaned by sandblasting or “roughing up” the original coating. Item 2: The Notice alleged that Respondent violated 49 C.F.R. § 192.605(b)(2), which states: § 192.605 Procedural manual for operations, maintenance, and emergencies. (a) …. (b) Maintenance and normal operations. The manual required by paragraph (a) of this section must include procedures for the following, if applicable, to provide safety during maintenance and operations. 2 Pipeline Safety Violation Report, at 9. 3 Response, at 2.#

520111001_Final Order_11282012_text.pdf, page 43 (1) …. (2) Controlling corrosion in accordance with the operations and maintenance requirements of subpart I of this part. The Notice alleged that Respondent violated 49 C.F.R. § 192.605(b)(2) by failing to include in its procedural manual for operations, maintenance, and emergencies, a procedure for controlling corrosion in accordance with the operations and maintenance requirements of Subpart I of this part. Specifically, the Notice alleged that North Baja had no written procedure for identifying abnormally high levels of pipe-to-soil potentials requiring remedial action. When reviewing the TransCanada Operations Procedure Manual 25.0 192.463 – Cathodic Protection Criteria, the inspector found that there was no written procedure for identifying what level of abnormally high pipe-to-soil potentials would require remedial action. Respondent did not contest this allegation of violation. Accordingly, based upon a review of all of the evidence, I find that Respondent violated 49 C.F.R. § 192.605(b)(2) by failing to include in its procedural manual a procedure for controlling corrosion in accordance with the operations and maintenance requirements of Subpart I of this part. These findings of violation will be considered prior offenses in any subsequent enforcement action taken against Respondent. ASSESSMENT OF PENALTY Under 49 U.S.C. § 60122, Respondent is subject to an administrative civil penalty not to exceed $100,000 per violation for each day of the violation, up to a maximum of $1,000,000 for any related series of violations. In determining the amount of a civil penalty under 49 U.S.C. § 60122 and 49 C.F.R. § 190.225, I must consider the following criteria: the nature, circumstances, and gravity of the violation, including adverse impact on the environment; the degree of Respondent’s culpability; the history of Respondent’s prior offenses; the Respondent’s ability to pay the penalty and any effect that the penalty may have on its ability to continue doing business; and the good faith of Respondent in attempting to comply with the pipeline safety regulations. In addition, I may consider the economic benefit gained from the violation without any reduction because of subsequent damages, and such other matters as justice may require. The Notice proposed a total civil penalty of $16,200 for the violations cited above. Item 1: The Notice proposed a civil penalty of $16,200 for Respondent’s violation of 49 C.F.R. § 192.605(a), for failing to follow its own procedures when repairing pipeline coating by first preparing the original coating through sandblasting or “roughing up”. The Respondent submitted several pieces of evidence in support of its request for a reduction of the proposed civil penalty. First, a TransCanada employee sent an email to the project contractor that specifically mentions that sandblasting should be assessed an extra labor charge. Second, it appears that, as of March 2007, prior to the attempted remediation of the coating damage in this case, TransCanada had a specification in place for coating applications on TransCanada facilities in#

520111001_Final Order_11282012_text.pdf, page 54 the United States that identified the appropriate surface preparation in great detail.4 Lastly, TransCanada submitted daily inspection reports and contractor invoices from the time of the 2007 repair that purport to demonstrate the affected areas were sandblasted. While the company has presented a great deal of evidence to demonstrate that it complied with its procedures, the most compelling evidence are the 2010 photographs of the excavated pipeline. If the work had been done according to TransCanada’s specifications, the 2010 pipeline would not be in the same condition as was noted in 2007. Given that the company has no explanation for the condition that was observed in 2010, it can only be inferred that, even though the Respondent properly contracted for the remediation, the affected areas were not in fact properly prepared prior to recoating. Despite its procedures, the Respondent failed to adequately verify that the work was properly completed and a potentially dangerous condition was allowed to persist for three years. This facility is located in a Class 1 location directly adjacent to a LNG facility. In the event of a pipeline failure and gas release, significant damage could have ensued. Accordingly, having reviewed the record and considered the assessment criteria, I assess Respondent a civil penalty of $16,200 for violation of 49 C.F.R. § 192.605(a). In summary, having reviewed the record and considered the assessment criteria for the Item cited above, I assess Respondent a total civil penalty of $16,200. Payment of the civil penalty must be made within 20 days of service. Federal regulations (49 C.F.R. § 89.21(b)(3)) require such payment to be made by wire transfer through the Federal Reserve Communications System (Fedwire), to the account of the U.S. Treasury. Detailed instructions are contained in the enclosure. Questions concerning wire transfers should be directed to: Financial Operations Division (AMZ-341), Federal Aviation Administration, Mike Monroney Aeronautical Center, P.O. Box 269039, Oklahoma City, Oklahoma 73125. The Financial Operations Division telephone number is (405) 954-8893. Failure to pay the $16,200 civil penalty will result in accrual of interest at the current annual rate in accordance with 31 U.S.C. § 3717, 31 C.F.R. § 901.9 and 49 C.F.R. § 89.23. Pursuant to those same authorities, a late penalty charge of six percent (6%) per annum will be charged if payment is not made within 110 days of service. Furthermore, failure to pay the civil penalty may result in referral of the matter to the Attorney General for appropriate action in a district court of the United States. COMPLIANCE ORDER The Notice proposed a compliance order with respect to Items 1 and 2 in the Notice for violations of 49 C.F.R. §§ 192.605(a) and 192.605(b)(2), respectively. Under 49 U.S.C. § 60118(a), each person who engages in the transportation of gas or who owns or operates a pipeline facility is required to comply with the applicable safety standards established under chapter 601. The Director has indicated that Respondent has taken the following actions to address some of the cited violations: 4 Page 8 of 20, TransCanada Specification, TES-COAT-EPU-US External Epoxy/Urethane Coating Systems. March 15, 2007.#

520111001_Final Order_11282012_text.pdf, page 65 In response to the Notice, Respondent modified its procedure 192.463 – Cathodic Protection Criteria, Section 4.0 subpart 5 to read as follows: Potentials that result in excessive generation of hydrogen are avoided to minimize the possibility of cathodic protection disbanding of coating systems or pipe damage. Polarized potentials more negative than -1.200 volts measured with reference to a saturated copper-copper sulfate half-cell may require further monitoring. Polarized potentials more negative than -1.300 volts measured with reference to a saturated copper- copper sulfate half-cell require diagnostic testing and/or further analysis as outlined in the Company’s standard, TES-CP-SS, Cathodic Protection Survey Specification and NACE SP0169-2007, Control External Corrosion on Underground or Submerged Metallic Piping Systems. Additional diagnostic testing is conducted when disbanded coating or pipe damage is discovered. Accordingly, I find that compliance has been achieved with respect to this violation. Therefore, the compliance terms proposed in the Notice for Item 2 is not included in this Order. As for the remaining compliance terms, pursuant to the authority of 49 U.S.C. § 60118(b) and 49 C.F.R. § 190.217, Respondent is ordered to take the following actions to ensure compliance with the pipeline safety regulations applicable to its operations: 1. With respect to the violation of § 192.605(a) (Item 1), Respondent must submit the semi-annual reports describing efforts to follow its written procedures for repairing pipeline coating damage. These reports must be transmitted to the Western Region Director until such a time as he determines that TransCanada has established an acceptable record of following its written procedures for repairing pipeline coating damage. The Director may grant an extension of time to comply with any of the required items upon a written request timely submitted by the Respondent and demonstrating good cause for an extension. Failure to comply with this Order may result in administrative assessment of civil penalties not to exceed $100,000 for each violation for each day the violation continues or in referral to the Attorney General for appropriate relief in a district court of the United States. The terms and conditions of this Final Order are effective upon service in accordance with 49 C.F.R. § 190.5. ___________________________________ __________________________ Jeffrey D. Wiese Date Issued Associate Administrator for Pipeline Safety#

520111001_closure letter_02122013_text.pdf, page 1Official PDFCERTIFIED MAIL - RETURN RECEIPT REQUESTED February 12, 2013 Mr. Lee Hobbs President and General Manager North Baja Pipeline, LLC 717 Texas Street Houston, TX 77002-2761 CPF 5-2011-1001 Closure Letter Dear Mr. Hobbs: On November 28, 2012, the Pipeline and Hazardous Materials Safety Administration (PHMSA) issued to North Baja Pipeline LLC a Final Order in the above-referenced case. The Final Order included a Compliance Order to take remedial actions on the portions of the pipelines located inside the Ehrenberg Compressor Station grounds. Specifically, North Baja Pipeline LLC modified its procedure 192.463 – Cathodic Protection Criteria, section 4.0 subpart 5. North Baja Pipeline LLC also submitted the semi-annual reports describing efforts to follow its written procedures for repairing pipeline coating damage. It has been determined that TransCanada/North Baja Pipeline LLC has established an acceptable record of following its written procedures for repairing pipeline coating damage. It has been determined that you have complied with the terms of this Order. PHMSA also received your civil penalty payment. Accordingly, this case is now closed and no further action is contemplated with respect to the matters involved in this case. Thank you for your cooperation in this matter. Sincerely, Chris Hoidal Director, Western Region Pipeline and Hazardous Materials Safety Administration cc: Robert Miller, ACC Tom Finch, PHP 500#